Defense Space Activities: Continuation of Evolved Expendable	 
Launch Vehicle Program's Progress to Date Subject to Some	 
Uncertainity (24-JUN-04, GAO-04-778R).				 
                                                                 
The U.S. space policy states that access to and use of space is  
critical to preserving peace and protecting U.S. national	 
security and also benefits the country's civil and commercial	 
interests. Air Force guidance explains further that access to	 
space requires the ability to launch critical space assets, when 
needed, by a mix of space launch systems from standard launch	 
pads at major support facilities. This is to ensure that a launch
failure or other catastrophic event does not prevent mission	 
success. These critical space assets, or satellites, are used for
a wide range of government activities such as communications,	 
navigation, and ballistic missile warning. The Evolved Expendable
Launch Vehicle (EELV) program, consisting of both Atlas V and	 
Delta IV launch vehicles, was established as the strategic launch
system to meet the nation's critical space mission needs and	 
correspond with U.S. policy that requires U.S. government	 
satellites to be launched on U.S. manufactured launch vehicles.  
Specifically, the EELV program's overarching objective called for
the development of a national expendable launch capability for	 
assured access to space that would reduce the overall recurring  
cost of launch by at least 25 percent to 50 percent while	 
maintaining or improving the reliability and capability levels	 
over those of the heritage systems. In its instruction on mission
needs and operational requirements guidance and procedures, the  
Air Force states that key performance parameters are so 	 
significant that failure to meet their minimum values could be	 
cause for program reevaluation or termination. The current EELV  
acquisition strategy addresses and reinforces the program's	 
objective and system capabilities by encouraging contractor	 
investment in launch vehicle development and promoting		 
competition over the life of the program in an expected robust	 
commercial marketplace. However, this commercial market never	 
materialized. Furthermore, the availability of federal funding	 
may affect future program strategy and condition. This letter	 
responds to a request by the Subcommittee on Strategic Forces,	 
Senate Committee on Armed Services. Our objective was to	 
determine the extent to which the implementation of the 	 
Department of Defense's (DOD) EELV program has achieved assured  
access to space and projected program cost savings.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-778R					        
    ACCNO:   A10634						        
  TITLE:     Defense Space Activities: Continuation of Evolved	      
Expendable Launch Vehicle Program's Progress to Date Subject to  
Some Uncertainity						 
     DATE:   06/24/2004 
  SUBJECT:   Aerospace contracts				 
	     Air Force procurement				 
	     Federal funds					 
	     National preparedness				 
	     Performance measures				 
	     Space exploration					 
	     Cost analysis					 
	     Strategic planning 				 
	     Rockets						 
	     Commercial markets 				 
	     Air Force Evolved Expendable Launch		 
	     Vehicle Program					 
                                                                 

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GAO-04-778R

United States General Accounting Office Washington, DC 20548

June 24, 2004

The Honorable Wayne Allard
Chairman
The Honorable Bill Nelson
Ranking Minority Member
Subcommittee on Strategic Forces
Committee on Armed Services
United States Senate

Subject: Defense Space Activities: Continuation of Evolved Expendable
Launch Vehicle Program's Progress to Date Subject to Some Uncertainty

The U.S. space policy states that access to and use of space is critical
to preserving peace and protecting U.S. national security and also
benefits the country's civil and commercial interests. Air Force guidance
explains further that access to space requires the ability to launch
critical space assets, when needed, by a mix of space launch systems from
standard launch pads at major support facilities. This is to ensure that a
launch failure or other catastrophic event does not prevent mission
success. These critical space assets, or satellites, are used for a wide
range of government activities such as communications, navigation, and
ballistic missile warning. The Evolved Expendable Launch Vehicle (EELV)
program, consisting of both Atlas V and Delta IV launch vehicles, was
established as the strategic launch system to meet the nation's critical
space mission needs and correspond with U.S. policy that requires U.S.
government satellites to be launched on U.S. manufactured launch vehicles.
The program was implemented in 1995 to support and sustain assured access
to space with more affordable launch vehicles, provided by two contract
launch providers, that replaced the past, or "heritage," systems such as
the Delta II, Atlas II, Titan II, and Titan IV.

Specifically, the EELV program's overarching objective called for the
development of a national expendable launch capability for assured access
to space that would reduce the overall recurring cost of launch by at
least 25 percent to 50 percent while maintaining or improving the
reliability and capability levels over those of the heritage systems. The
Air Force further identified four EELV system capabilities referred to as
key performance parameters-mass to orbit,1 vehicle design reliability,

1 Mass to orbit is the requirement to lift a certain amount of payload to
a specific orbit.

standard launch pads, and standard vehicle interfaces2-considered
essential for mission success. In its instruction on mission needs and
operational requirements guidance and procedures, the Air Force states
that key performance parameters are so significant that failure to meet
their minimum values could be cause for program reevaluation or
termination.

The current EELV acquisition strategy addresses and reinforces the
program's objective and system capabilities by encouraging contractor
investment in launch vehicle development and promoting competition over
the life of the program in an expected robust commercial marketplace.
However, this commercial market never materialized. Furthermore, the
availability of federal funding may affect future program strategy and
condition. For instance, GAO has stated that the U.S. government's
long-term financial condition presents enormous challenges to the nation.
This condition is likely to affect a broad range of federal programs.

This letter responds to your February 25, 2004, request. As agreed with
your offices, our objective was to determine the extent to which the
implementation of the Department of Defense's (DOD) EELV program has
achieved assured access to space and projected program cost savings. On
April 6, 2004, we provided your offices with a briefing on our
observations regarding the EELV program's achievements. As requested, we
are transmitting the briefing (encl. I) in this letter.

In conducting our work, we reviewed laws, presidential directives, and DOD
and Air Force policy documents on assured access to space, as well as
pertinent EELV program reports and related material, to determine the EELV
program's progress in achieving program mission objectives and cost goals.
We interviewed responsible DOD, Air Force, and other government officials
from, among others, the EELV System Program Office; Office of the
Secretary of Defense; and the Cost Analysis Improvement Group. We also
interviewed Air Force officials at offices of the Secretary of the Air
Force, Air Force Operational Test and Evaluation Center, and Air Force
Space Command and responsible space access officials at the National
Aeronautics and Space Administration. Furthermore, we inspected the Delta
IV launch site at Vandenberg Air Force Base, California, and toured the
Atlas V production facility in Denver, Colorado. Additionally, we received
briefings by both launch providers. We discussed relevant information with
appropriate officials to assess its validity and determined that the data
were sufficiently reliable to answer our objective. Our review was
conducted from April 2003 to May 2004 in accordance with generally
accepted government auditing standards.

2 Common launch vehicle interfaces such as mechanical and electrical
connections, ground support equipment, services, and environmental
conditioning provide the flexibility to change the launch vehicle in case
there's a major problem requiring extended repair.

Summary

While the EELV program achieved success in meeting its assured access to
space and cost-saving objective, the program continues to face various
risks and cost increases that could jeopardize this objective. Since
August 2002, the EELV has been launched successfully six times using two
contract launch providers, and the EELV System Program Office projected 25
to 50 percent in cost savings over previous launch systems initially
through July 2003 and recently in May 2004. Furthermore, three out of four
of the Air Force's key performance parameters have been met, which
contributed to initial program success. While the fourth parameter, the
standard vehicle interface, has not yet been fully met for both launch
providers' vehicles, progress has been made in achieving solutions.
However, vehicle mission reliability, which is the ability to complete the
entire mission successfully (i.e., from launch to satellite replacement),
has not been fully demonstrated. Several more launches need to take place
before vehicle mission reliability can be assured. Furthermore, program
risks, such as a potential single point of failure involving one upper
stage engine used by both launch providers, present, at this time, some
uncertainty about continuing to achieve the assured access to space part
of the EELV's program objective and present cost implications.

Program costs have increased over the approved 2002 program baseline
estimate of $18.8 billion, resulting from the failure of the commercial
market to materialize, additional access to space and mission assurance
initiatives, and several other factors such as incorrect inflation
assumptions and satellite weight growth. Specifically, the EELV System
Program Office reported about $13.3 billion in program cost increases over
the life of the program, as reflected in previous DOD acquisition reports.
These cost increases impact the cost-savings goal, although the
significance of that impact cannot be determined until the Air Force
submits a revised program cost baseline. Furthermore, these cost increases
triggered a requirement3 requiring the Secretary of Defense to certify
that the EELV Program is critical to national security and that revised
program cost estimates are reasonable. The certification process was
completed on April 26, 2004, after the Secretary of Defense's
certification group identified a potential cost increase of up to $13.2
billion. This figure differs from the $13.3 billion previously reported by
the EELV System Program Office because it includes some overlapping costs
addressed in prior DOD acquisition reports and additional unrecognized
costs such as the launch providers' infrastructure costs that will be
incurred in fiscal year 2005. The System Program Office disagrees with the
addition of some of these previously unrecognized costs in the recently
certified program baseline cost estimate and is working with the
certification group to adjust the baseline by the end of June 2004.
Despite this disagreement, the System Program Office, in May 2004,
estimated launch cost savings of 51.4 percent over the heritage systems.
The System Program Office is also in the process of modifying the existing
acquisition strategy to better achieve EELV program objectives. The
government,

3 10 U.S.C. S: 2433 commonly referred to as the "Nunn-McCurdy Act"
requires notification of Congress when major acquisition programs exceed
specific cost thresholds.

however, will continue to pay a significant share of costs until a
commercial market emerges and the cost burden shifts to others requiring
launch services.

Background

In mid-1994, the Air Force conducted a study to address the deficiencies
and the rising costs of space launch. While considering options, the Air
Force determined that continued production, operation, and maintenance of
existing launch vehicle systems were not cost-effective. Increasing
expenses associated with these launch vehicle systems and their extensive
infrastructure along with outdated technologies, designs, and
manufacturing techniques generated the need for a more capable,
affordable, and flexible launch vehicle system. Later that year, a plan
was selected to improve, modernize, and evolve existing expendable launch
vehicles that served as the genesis of the EELV program. By May 1995, the
Air Force initiated a new acquisition strategy to obtain launch services
using the EELV system. While the Air Force's initial acquisition strategy
was to select one contractor for final development and production, in
November 1997 it approved a revised acquisition strategy designed to
maintain the ongoing competition between the two previous pre-engineering
phase contractors. The revised strategy was based on forecasts that growth
in the commercial space launch services market would support more than one
contract launch provider.

The EELV Program Acquisition Strategy was structured to break new ground
in the area of military and commercial integration of the space-related
defense industrial base with the commercial industrial base. This strategy
forged a partnership between the government and industry to gain
affordable and assured access to space by

o  promoting competition for launch services over the life of the program;

o  	encouraging contractor investment and innovation for launch vehicle
development;

o  	procuring launch services that include the vehicle, the liftoff, and
flight to orbit under one contract instead of procuring launch vehicles
and launch operations under two or more separate contracts;

o  leveraging the benefits of a robust commercial marketplace; and

o  	providing the government with free and open access to contractor
performance data.

This acquisition strategy permitted the government to obtain launch
services that placed a satellite in the proper orbit at a fixed price
instead of having to buy launch vehicles on a cost reimbursement basis
while paying for launch pad operations, maintenance, repairs, and
improvements.

Despite the initial promise of the EELV Program Acquisition Strategy, the
expected robust commercial market for space activities never materialized.
Furthermore, future federal funding may affect the program's acquisition
strategy and condition. GAO has recently stated that the U.S. government's
long-term financial condition and fiscal outlook present enormous
challenges to the nation and to the role of the federal government. The
growing long-term fiscal imbalance will continue to

constrain the federal budget in future years. These constraints will, in
turn, affect DOD investments in the EELV program.

Progress Made in Achieving Assured Access to Space and Cost Savings
Objective, but Program Risks Present Some Uncertainty for Continued Access
to Space

The EELV System Program Office has made progress in implementing DOD's
assured access to space program objective through early successful
launches and cost savings over heritage systems. While three of four
performance parameters have been met, certain elements of the remaining
performance parameter are currently unrealized. Nevertheless, progress is
being made to meet them. However, program risks present some uncertainty
in continuing to achieve the access to space objective.

Progress Was Made in Achieving EELV Program's Objective

The EELV System Program Office and two launch providers, working together,
have met the assured access to space objective by completing six
consecutive successful missions (two government missions and four
commercial missions) between August 2002 and August 2003. According to a
December 2002 Air Force Test and Evaluation Center Operational Assessment
report, the EELV system is a significant improvement over the heritage
launch systems it replaces. For example, the report stated that the level
of standardization implemented under EELV would reduce costs and launch
schedule delays and allow for contingencies that the heritage systems
could never provide. Further, according to the EELV System Program Office,
launch services acquired under the current government contract met
projected program cost savings of 25 percent to 50 percent-projected at
50.8 percent in July 2003 and at 51.4 percent in May 2004-over heritage
launch systems. We were unable to verify the statements or projections.

This early success is based, in part, on the program structure, management
initiatives, and initial favorable launch service costs. For example, in
order to monitor risk, System Program Office Integrated Product Teams,
comprised of government and industry representatives, were established
with the responsibility to address issues before they become serious
matters of concern. The EELV System Program Office and launch providers
also maintain open lines of communication, interacting on a daily basis to
gauge program progress, resolve issues, and monitor performance. Further,
the government benefited from "Initial Launch Services" contracts that
reflected substantially lower launch services prices to the government
that were submitted in anticipation of a robust commercial marketplace.
This, in turn, was to allow the launch providers to spread substantial
fixed costs among all of the participants in the market.

While Progress Continues on the Remaining Performance Parameter, Risks
Present Some Uncertainty for Future Mission Success

According to the EELV System Program Office, the EELV systems have met
three of four performance parameters that the Air Force considers
essential for mission success. The EELV Atlas V and Delta IV systems have
not met elements within the fourth parameter-standard vehicle interface.
Furthermore vehicle mission reliability, which is the ability to complete
the entire mission from launch to placement of the satellite in orbit, has
not been fully demonstrated. With regard to the parameter's elements, both
families of launch vehicles (i.e., the Delta IV and Atlas V systems) have
vibration problems that exceed the vehicles' established performance
parameters. The vibrations, caused by the separation of the nose-cone from
the Delta IV launch vehicle, and the noise, generated from the Atlas V
solid-fuel rocket engines during initial launch, exceed acceptable
performance parameters. The EELV System Program Office and its launch
providers are currently working on solutions to these problems. Regarding
the Delta IV vehicle, a design solution is being pursued, and a
modification is being tested for the Atlas V vehicle. With regard to
vehicle mission reliability, according to DOD and Air Force test and
evaluation and Space Command program officials, determination of the EELV
systems' mission reliability is typically demonstrated by 10 to 30
successful launches within the same family, class, and configuration of
launch vehicles (e.g., a Delta IV medium launch vehicle with two strap-on
solid rocket engines). Thus, several more launches need to take place
before vehicle mission reliability can be fully demonstrated.

While progress regarding all performance parameters has been made, several
program risks present some uncertainty in achieving continued assured
access to space. First, both launch providers use a variant of the RL-10
engine for the EELV's upper-stage that is a potential single point of
failure for the system. While the RL-10 engine has a proven reliability
record, if a launch failure occurred and were attributed to the engine,
neither launch provider would be able to launch its vehicle until an
investigation was completed. The Air Force has funded a study to evaluate
the engine's critical components, producibility, and viability. Second,
even though the Atlas V launch contractor has 13 RD-180 launch vehicle
engines in its U.S. inventory, continued engine availability remains
uncertain because the engine is produced solely in Russia. To address this
issue, that contractor plans to build a co-production facility in the
United States. However, the operation of a U.S. co-production facility is
not scheduled until 2008; and the first mission-ready, co-produced U.S.
RD-180 engines may not occur until 2012, which is over halfway through the
EELV program life. If the RD-180 U.S. co-production facility is not
completed, U.S. dependence on the Russian-made engine will be prolonged.
And third, the risk of not having an operational West Coast launch pad for
the Atlas V vehicle leaves only the Delta IV family of vehicles capable of
launching from both coasts. Although the Atlas V contractor has begun
building a West Coast launch pad, it is not scheduled to be operational
until May 2005 with the first Atlas V launch occurring in October 2005.
While the EELV System Program Office is working to mitigate these risks,
assured access to space is subject to some uncertainty. Mitigating these
risks to avoid the

possibility of mission failure will have an impact on cost, as discussed
in the following section.

EELV Program Costs Have Significantly Increased, Potentially Impacting
Cost Savings and Prompting a Revised Acquisition Strategy and Contract
Approach

Increased program costs resulting, in part, from future infrastructure,
launch, and other costs could impact the EELV program's cost savings
objective. However, the specific impact has not yet been determined. This
increase in costs was caused, in part, by the failure of the commercial
market for launches to materialize. EELV launch providers claimed that
this market failure negatively affected their financial condition,
prompting the need for a revised Air Force acquisition strategy and
contract approach to assure access to space with two viable launch
providers.

Program and Launch Costs Have Increased for Several Reasons, Potentially
Impacting Cost Savings

Program and launch costs increased by about $13.3 billion over the
approved 2002 baseline estimate of $18.8 billion for several reasons, as
reflected in DOD's December 2003 Selected Acquisition Report and other
program documentation. First, program initiatives to mitigate the risk of
a launch failure and increase mission success and safety required
additional funding. The EELV System Program Office considered these
initiatives critical to improve launch vehicle system reliability and
support assured access to space. Next, several other factors such as
launch reallocations, contract modifications, satellite weight growth, and
inflation contributed to cost growth. Furthermore, the commercial market
failed to materialize as expected, significantly raising costs to the
launch providers under the launch services contracts and eventually
causing them to renegotiate, with the government paying a larger portion
of the fixed costs. The EELV System Program Office reported the cost of
these initiatives and other factors as follows:

o  	Assured access to space and safety initiatives costing $538.8 million
through fiscal year 2009.

o  	Mission assurance initiatives for fiscal years 2010 through 2020
costing $527 million.

o  	Reallocation of seven launches from one contractor to the second for
Procurement Integrity Act4 violations and Air Force support for the second
West Coast launch pad totaling $227 million.

o  	Satellite weight growth that required the use of larger and more
expensive launch vehicles costing $1.335 billion.

4 41 U.S.C. S: 423. The Procurement Integrity Act restricts the disclosing
and obtaining of contractor bid or proposal information.

o  Incorrect inflation assumptions of $2.821 billion.

o  	Price increases on the second and all subsequent launch services
contract awards costing $7.807 billion due to the lack of a commercial
market.

According to the EELV System Program Office, the next contract for up to
20 launches is anticipated to be completed in the summer of 2004 but might
be delayed until Procurement Integrity Act sanctions against one launch
contractor are lifted. The government may procure individual launches on
an "as needed" basis until the sanctions are lifted and a new contract
takes effect.

Because of these realized and expected cost increases, the EELV Program
Office anticipated a breach of the 25 percent cost increase threshold
established by title 10 United States Code section 2433, or the
Nunn-McCurdy Act.5 As a result of the anticipated breach, the Office of
the Secretary of Defense certified that

o  this acquisition program is essential to the national security;

o  	there are no alternatives to this program that will provide equal or
greater military capability at less cost;

o  	the new estimates of the program acquisition unit cost or procurement
unit cost are reasonable; and

o  	the management structure for this program is adequate to manage and
control total program acquisition unit cost or procurement unit cost.

To provide a basis for this certification, the Office of the Secretary of
Defense initiated an examination by the Cost Analysis Improvement Group,
an independent DOD audit group responsible for estimating and verifying
costs, to review and validate program costs. Based on the Cost Analysis
Improvement Group's examination, the Office of the Secretary of Defense's
certification was completed on April 26, 2004. This group reported
additional cost increases built into the revised program cost baseline
based on 137 operational missions instead of the previous 181 manifested
missions. The Cost Analysis Improvement Group's revised estimates included
about $13.2 billion in potential costs consisting of the following:6

o  	Annual fixed infrastructure costs to fund the EELV launch complex,
supplier readiness, production facilities, a government mission director,
and mission assurance. Mission assurance costs occurring in fiscal years
2010 through 2020 will be incorporated into annual fixed infrastructure
costs under a new acquisition strategy and contracting approach.

o  	Fiscal year 2005 infrastructure costs to be recovered by the launch
providers during fiscal years 2006 through 2009.

o  	RD-180 engine co-production development costs billed to the government
during fiscal years 2006 through 2015.

o  	Launch providers' recovery of losses incurred on the first and second
launch services contracts to be recouped during fiscal years 2006 through
2009.

5 10 U.S.C. S: 2433.
6 Individual costs are excluded from the estimates because some of those
costs are proprietary.

Some of these costs had not been included in previous EELV DOD reports.
Conversely, annual fixed infrastructure costs contain some mission
assurance cost amounts (e.g., video instrumentation for selected flights)
that were previously included in these reports.

The EELV System Program Office, however, disagrees with the Cost Analysis
Improvement Group about including costs of the Atlas V RD-180 engine
coproduction development, recovery of launch providers' financial losses
from previous launch agreements, and fiscal year 2005 infrastructure cost
recovery in the revised EELV program cost estimate. The EELV System
Program Office's position is that the Atlas V RD-180 engine co-production
development costs, launch service losses, and fiscal year 2005
infrastructure costs should be borne by the launch providers. While the
Office of the Secretary of Defense certified the program for continuation
based on the Cost Analysis Improvement Group's cost estimate, it directed
the Air Force and the Cost Group to update their estimates. The Air Force
is to submit a revised program cost baseline within 60 days of the April
26, 2004, certification. Until the revised program cost baseline is
established, the specific impact of program cost increases on program cost
savings cannot be determined. Nevertheless, using its own estimate, the
EELV System Program Office in May 2004 projected life-cycle program cost
saving of 51.4 percent over the heritage systems.

Acquisition Strategy Will Be Revised to Restructure Contracting Provisions

According to the two launch providers, they have incurred substantial
financial losses as a result of the failure of commercial launch market to
materialize, leading them to work with the EELV System Program Office to
modify the acquisition strategy and contract approach. They are
considering changing from a "fee for service" firm fixed price contract to
an approach that will use a combination of fixed price contracts for
actual launch services and cost reimbursement/fixed price contracts to pay
for contractors' fixed costs. Under this new approach, the EELV System
Program Office will pay for infrastructure upkeep previously absorbed by
the launch provider.

Other key features of this revised acquisition strategy include

o  	maintaining mission success as the number one priority and providing
launch providers with incentives to achieve this goal;

o  	encouraging the launch providers to innovate and increase launch
market business; and

o  	maintaining an affordable program with balanced production of launch
vehicles given limited competition.

According to the launch providers, changes in the acquisition strategy and
contract approach are necessary for each provider to avoid a repetition of
their financial losses. They believe this contract approach may sustain
their technical and financial viability. Furthermore, the Under Secretary
of the Air Force stated in recent congressional hearings that it was
important for the Air Force to develop a strategy

that "does not cause either provider to go into a death spiral of trying
to be competitive or face extinction."

Conclusions

Having a strategic launch capability, as cited in U.S. space policy, is
critical to the nation. However, program risks and significant cost
increases create some uncertainty about the continued achievement of
assured access to space. Because a robust commercial space launch market
may not materialize for some time, the government might be burdened with a
larger share of launch providers' fixed costs. In addition, continued
escalation of EELV program costs, in a fiscally constrained environment
with intense funding competition, is likely to raise more concerns about
the program's strategy, execution, funding, and risk mitigation
initiatives. As we have noted, key decisions or program changes resulting
from the recently completed certification from the Office of the Secretary
of Defense, the Air Force's revised program cost baseline due in June
2004, and expected revisions to the launch acquisition strategy and
contract approach will affect the EELV program's strategy and funding.
They could also negatively impact mission success if such decisions and
changes are not carefully conceived and applied.

Agency Comments

We requested official comments from DOD. The department's Office of
Networks and Information Integration reviewed a draft of this letter and
elected not to provide written or oral comments.

                                     ------

We will send copies of this letter to appropriate congressional
committees; the
Secretary of Defense; the Secretary of the Air Force; and the Director,
Evolved
Expendable Launch Vehicle Program. In addition, the letter will be
available at no
charge on our Web site at http://www.gao.gov. If you have any questions,
please
contact me at 202-512-6020. James Bancroft, Aisha Cabrer, Jane Hunt,
Kenneth
Patton, and George Vindigni were major contributors to this letter.

Raymond J. Decker
Director, Defense Capabilities

and Management

Enclosure

                                    (350357)

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